At meeting, Fed to weigh options to revive economy

As the recession grinds on, Federal Reserve policymakers will open a two-day meeting Tuesday to make a fresh assessment of economic conditions, review the effectiveness of programs in place and weigh whether they need to expand or change them.

Any policy decisions would come Wednesday.

Fed Chairman Ben Bernanke and his colleagues have already ratcheted down a key lending rate for banks to a record low near zero. To ease the impact of the recession, economists predict the Fed will keep its targeted range for its bank lending rate between zero and 0.25 percent at this week’s meeting and probably well into next year.

Fed officials have left the door open to announcing a new relief program, though they haven’t hinted in recent weeks of any new efforts.

“I think the Fed will want to convey a message of continued determination,” said Ethan Harris, economist at Barclays Capital. He thinks the likelihood that the Fed will launch a new program is fairly low, “but not zero.”

For now, economists aren’t expecting the kind of bold action the Fed took at its last meeting in mid-March. That was when it decided to plow a staggering $1.2 trillion into the economy to try to lower interest rates and stimulate borrowing and spending.

More spending by consumers and businesses would help lift the country out of the recession, which has dragged on since December 2007.

At the March meeting, the Fed decided to start buying long-term government debt and to boost purchases of mortgage-backed securities from Fannie Mae and Freddie Mac.

The Fed and the Treasury Department have rolled out a string of radical programs to loosen credit and strengthen the banking system, which has suffered huge losses on soured investments. Those efforts have led to some improvements, but credit and financial markets are still not operating normally.

Some economists said the Fed might provide more details on an existing program aimed at jump-starting lending to consumers and small businesses, called the Term Asset-Backed Securities Loan Facility.

Much hope is riding on that program, which has gotten off to a rocky start. It’s been hobbled by rule changes, investor worries about financial privacy and fears that participants might become ensnared in an anti-bailout backlash from the public and Congress. Just $1.7 billion in loans was requested for the second round of funding in April — down from $4.7 billion in March.

Investors use the money to buy newly issued securities backed by auto loans, student loans, credit cards and other debt. The program will be expanded to include commercial real-estate loans.

“The program hasn’t gotten very far,” said Mark Zandi, chief economist at Moody’s Economy.com. “Perhaps the Fed will provide some guidance on TALF.”

The Fed could revise TALF to try to make it more attractive to investors. Or it could opt to directly buy other types of assets it isn’t currently purchasing, such as mortgages securities not guaranteed by Fannie Mae and Freddie Mac, or high-grade corporate bonds, Harris suggested.

The Fed’s decision to buy mortgage securities backed by Fannie and Freddie has helped drive down mortgage rates. Average rates on 30-year fixed mortgages have dipped to 4.8 percent, Freddie Mac reported last week. Last year at this time, the average rate on a 30-year mortgage was 6.03 percent.

Bernanke has said the recession could end this year if the government managed to stabilize financial markets. In recent remarks, both Bernanke and the Fed’s No. 2 official, Donald Kohn, have noted “tentative signs” that the recession might be easing.

Many analysts think the economy will continue to shrink in the April-June quarter, perhaps at a rate of 2 to 2.5 percent, but not nearly as much as it had been.

In the final three months of 2008, the economy contracted at a 6.3 percent rate — the worst showing in a quarter-century. And economists say it probably declined at a 5 percent rate in the first three months of this year. The government will release its initial estimate for first-quarter economic activity Wednesday morning.

Analysts generally think the Fed, in its meeting this week, will signal that the free-fall in the economy may be letting up somewhat.

“We’re still on an elevator going down — but not going down as fast,” said Stuart Hoffman, chief economist at PNC Financial Services.

President Barack Obama is counting on his $787 billion stimulus package, which includes tax cuts and increased government spending, to help sustain the economy. And some Americans are already seeing fatter paychecks because of tax reductions. Economists hope at least some of that money will be spent to support economic activity.

Even if the recession ends this year, the economy will remain weak and the unemployment rate will likely keep climbing. Skittish employers watching their sales and profits shrink have cut a net total of 5.1 million jobs since the recession began.

Employers won’t be inclined to boost hiring until they are confident any recovery has staying power.

The unemployment rate, now at a quarter-century high of 8.5 percent, is expected to hit 10 percent by year’s end and keep rising early next year before it starts inching down. Economists say employment conditions may not return to normal — meaning a 5 percent jobless rate — until 2013.